Friday 30 September 2016

Banking Inquiry: Central Bank 'too deferential to Government', according to bank economist

Clodagh Sheehy

Published 10/06/2015 | 18:05

Central Bank
Central Bank

The Central Bank was too deferential to Government, concerns of staff were watered down and views blocked by political and property interests on the Bank’s Board according to an economist employed by the Bank.

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Mr Thomas O’Connell, economist at the bank from 1970 to 2011, pointed to a ​G​overnor appointed by the Minister, a Secretary General of the Department of Finance on the Bank Board which was heavily weighted with political supporters of government.

In his experience concerns raised by staff were “invariably watered down so as not to reflect adversely on matters of concern to Government”.

Mr O’Connell, who was appointed Assistant Director General of the Economics Division in 2005, told the Inquiry “it was difficult to get views through that might impinge on vested interests”.

As land and property prices “escalated to bizarre and absurd levels” he had written in the Bank’s quarterly bulletin there was need to consider further rezoning to increase the housing supply.

“That was blocked from reaching a higher level in the Bank in the light, in my view, of political and property interests on the Bank’s Board.

Furthermore in the Bank “we had no knowledge of the large exposures of the banks to individual developers.  Such data were rigorously concealed from my level in the bank”.

Mr O’Connell insisted it was completely incorrect to say that no-one seemed to know the property bubble was developing.

“At the decision-making levels in the Bank, either people were unaware of what was happening, despite the clear evidence, or they were aware and chose to do nothing. Either way, it all seems quite incomprehensible.”

The economist said at one point a memo was sent between 2002 and 2003 from the Economics function in the bank to the then Governor recommending that lending to the property sector needed to be reined in.

The response to the note was that the Governor would have to consider bringing the proposals to the Board.

“However at the top of the note were the words, evidently added subsequent to the first comment ‘That is out of the question’”.  Mr O’Connell added that he had a copy of the memo.

He said he had been told in response to pleas to rein in the banks “The Central Bank is not going  to collapse the construction sector”.

Mr O’Connell also said he was “specifically prevented” from bringing to the Bank’s Financial Stability Committee data on house price levels across Europe.

“The powers-that-be preferred to adopt an ostrich-like approach to the massive problem”.

When the OECD published a view that Irish property prices were greatly overvalued  “I was instructed to contact the authors of the report to retract their published views”.

At another point he was “instructed to request the Director of the ESRI” to ensure it did not publish comments about the banks being in “rather a fragile state”.

In the 2007 Financial Stability Report, “a deliberate decision was taken to delete the conclusions of a research study updating the extent of the overvaluation of Irish property prices.”

Mr O’Connell believed that “more generally at the staff level in the Bank, people were fully aware of the huge excesses of property mania.”

He concluded that too many people were benefitting from the boom time for prudent avoidance measures to have been taken.

He said in future  attention should be paid to important indicators like sharp movements in bank share prices and credit default swaps and high rates of bank lending, particularly to the property sector.

There should be a proper mix of people with appropriate skills on the boards and to management of key institutions and a greater willingness to listen to contrarian views.

It is also fundament that the Central Bank exercises its independence without regard to finding favour with various interest groups.

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